A couple of months ago I described the current financial crisis as "the wake up call for corporate governance," predicting that "the financial industry will return, in a way, to its partnership roots." The longer reasoning is in my Uncorporating the Large Firm.
So I read with interest Michael Lewis' words of wisdom in Portfolio:
No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.
It's about what happened when Wall Street abandoned the partnership model. Read the whole thing.
I think Lewis overestimates owner/operators' ability to restrain their own idiocy. Bear was heavily employee owned, and its people took huge hits to their net worth. Sure the governance structure was public, but the financial incentives to the people making the decisions were still there.
Posted by: Kevin | November 12, 2008 at 04:00 PM
One of the things that I have seen is you have children grown into adults that have never ever actually had their own assets on the line, so they play hard and fast with the assets of their companies, not realizing that being over extended will completely absolutely wipe you out if things go wrong, and inevitably they will.
That is why I will take the grizzled old veteran who has banged their head up against many walls over the MBA any day..
Its all about perspective and knowing that it is your neck that is on the line.
Virgil
http://www.KeepAmericAtWork.com
Posted by: Virgil Bierschwale | November 13, 2008 at 06:17 AM
Larry, when you read the entire article, Lewis uncovers that the real fraud. The use of unregulated synthetic CDO's to meet short sales that had no assets backing the bet.
Posted by: michael webster | November 13, 2008 at 08:15 PM